Tuesday, December 9, 2008

Phases of Recession

With a sleuth of layoffs coming from all angles, why don't we take a step back and see where we are in the phases of recession. At macroscopic level, the cycle looks like a tidal wave, and the recession is a long process of declining economy.

I'm speaking strictly from the perspectives of startup economy, regardless of geography.

Phase I (tipping point): The implosion of subprime crisis crept into Wall Street during the summer of 2007. We thought the economy was booming as consumer spending increases, and even the no-job-no-money-joe next door was buying a luxurious condo. Good times. VCs were seeing a very good deal flow and internet entrepreneurs were just going upbeat about entering the online advertising market where billions of more dollars will be spent. Times are good, and we don't know if Fannie and Freddie will go belly up... yet.

Phase II (not my problem): Subprime crisis had already happened, and we can't buy our dream condo. So what? We know that we never deserved all that luxury by leveraging the balance sheet through the roof? Time to get realistic here, but everything is going to be okay. Unlike the dot com collapse earlier in this decade, it's not my problem. VCs are still out raising the historically largest fund, and entrepreneurs still go out raising enough capital to get through the next milestone.

Phase III (OMG, the financial sector is in deep trouble. I'm still okay though): Late summer of 2008, Merrill and Lehman went belly up, and the federal government intervenes with a huge pot of taxpayers' money. It just needed to be done to save us from the worst situation, because times are REALLY getting touch. We in the startup economy finally realize that the problem is big but still don't see the huge incentives to be hungry. People are having problems, but not in our office. We are still hitting all that milestones. Maybe we'll lose WaMu as a customer, but still not my problem.

Phase IV (TIME OF UNCERTAINTY): This is the time we are in. Sequoia Capital "leaked" the good ol' graveyard deck. Sequoia, probably the most respected VC firm in the entire history of venture capital, starts to have the ripple effect. Now, it looks like we are in some real deep trouble. It doesn't matter if our sales are still on target or have had raised $100M in the past month. Sequoia told us to tighten our budget, hit profitability, and survive at the end of the tunnel, and I'll do exactly that. But I don't know how. Maybe Obama will solve all our problems when he takes the office with a big economic stimulus plan. Until then, I'll sit and wait. I have enough cash to take us through another two months.

I also noticed a lot of uncertainties while attending conferences recently. Many VCs are saying that they are closing deals now, and there will be more. There will be very attractive investment opportunities because they will get lower valuation and better returns. Don't we all know that the uncertain outcome of their investments makes them worried as well? Do they really feel better about those lower valuations? What about entrepreneurs? Startups these days know that the power shifted to people with money. But, are they reallly willing to get squeezed in valuation? How many times we've heard that running a startup is cheaper than ever while successful startups took hundres of millions of dollars? Maybe, bootstrap is a way to go. I don't know. What I know is that this time of uncertainty causes the startup economy to hide in the cave until we see some sun light.

Phase V (hiatus of innovation): Times are getting worse. By the way, this is the most important phase that I want to double emphasize in this post. Customers stop buying and ask for more for less. I'm runnning out money. Nobody's telling me that I'm in trouble anymore, because I feel the pain in person. I need to survive.

Let's take a step back.... to the good ol' days when we were in school. When was the best time to be doing the homework with all your attention and capabilities concentrated on one darn deliverable? Perhaps... at the last minute? Yes, you are "hungry" and feel the urgency. Whether it was voluntrary or not, you were really doing something amazing with all those natural born skills. Then, you turn in your homework and take a deep breath. You don't remember how you did it... but you did it.

This is exactly what will happen to most startups. Economy, as we all know it, is cyclical. Times may get tough. But keep in mind that we need to be mentally and physically ready to take on these challenges. We'll get more innovative and creative when it comes to survival. If we can do this beforehand (say... now), it's even better.

Why don't we all "fake" to be in Phase V and innovate like there's no tomorrow?